After big fall in bad loans, ECB calls for gradual clean-up

FRANKFURT (Reuters) - Euro zone banks have brought down their pile of unpaid loans “enormously” and further progress, while necessary, should be gradual, European Central Bank Vice-President Vitor Constancio said on Thursday.

European Central Bank (ECB) Vice President Vitor Constancio gestures during a news conference following the governing council's interest rate decision at the ECB headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach

Unpaid loans at large euro zone banks totalled 759 billion euros at the end of September, having fallen from 920 billion euros only a year earlier thanks to strong economic growth and ECB pressure on banks to offload them.

While Constancio steps down at the end of May, his words are likely to be welcomed by bankers in countries with high stocks of bad loans, such as Italy, who have feared a new crackdown from the ECB.

“The situation has continued to improve enormously,” Constancio said at a news conference after ECB rate-setters left policy on hold.

“Progress is still necessary. The progress has to be gradual as everyone acknowledges it cannot be done from one moment to the other,” he added.

Reuters reported on Monday that the ECB was considering shelving planned rules that would have forced banks to set aside more money against their stock of bad loans, after criticism from lawmakers, bankers and even from within the institution.

The planned rules, which had been expected by March, were seen as a main plank of the ECB’s plan to bring down a 759 billion euro ($930 billion) pile of soured credit weighing on euro zone banks, particularly in Greece, Portugal and Italy.

But an impact-assessment study by Constancio’s staff highlighted the side-effects they would have on banks in terms of greater need for capital, sources told Reuters.

Constancio did not comment on the story but said it was the ECB’s duty to protect financial stability as well as the health of individual banks.

He said non-performing loans (NPLs), now 4.8 percent of all bank credit, no longer represented an immediate threat as lenders now have more capital to absorb possible losses.

“The banks are much better-capitalised than before and that’s very important because it means in the short term that the question of NPLs is not a question of solvency,” Constancio said.